As a fellow free-market libertarian, and also a telecom blogger, I ought to be in agreement with Russell Roberts’s critique of municipal “socialist” telecom networks.
Yet I’d like to offer, if not a contrary view, at least a different perspective on muni networks. I believe there are good and bad reasons to build them. But dismissal is not an option.
Yes, there’s a clear transfer payment in favour of people who are unwilling to pay the current market-clearing price of a broadband connection. This is a net loss of utility to society, since the taxpayers whose money was confiscated had other, more pleasant, ways of spending this money in mind.
But there are also reasons to consider the free flow of information via telecom networks as a special and unique case. Information goods may not always conform to classical economic models, such as rivalrous consumption.
Let’s take the market economics first.
The most important and unusual feature of telecom networks is that much of their value is option value — the ability to cater for unknown applications. E-mail, the Web, P2P, podcasting — none were there at the birth of the Internet. (Search for “End to end principle” and “Rise of the Stupid Network” for more data.) Unfortunately, the desire to price discriminate by a commercial supplier also serves to destroy option value, by limiting messages exchanged to those forms for which a tariff has been devised. The act of price discriminating network traffic and billing is also horiffically expensive. However, the desire to price discriminate is overwhelming, because of the billion-fold difference in value of different traffic types.
Telecom networks potentially generate huge consumer suplus. There is also an elemet of merely co-ordinated self-supply in a muni network. You do no harm by fixing your own blocked sink rather than calling a plumber. By engaging a general contractor, a locality effectlvely self-supplies itself (“unplugs its own data sink”), and retains the full consumer suplus. Again, because of the nature of networks, this isn’t something users can do unilaterally.
There may be a co-ordination problem that corporations find hard to overcome. Most communications are geographicaly local, but there’s little point in buying a videophone if insufficient of your friends and family across town — some of whom are in poorer households and districs — have one first. The natural unit of purchase of a telecom network may be greater than the single household, by the very nature of being a network.
Those poorer households are hard to cross-subsidise via market means, because the applications, where most of the money is spent, are separated from the connectivity. It’s so far proven impossible to make the cross-subsidies between different connectivity buyers and application users work in an effective and fair manner, particularly when users are on different networks. The coordination and transaction costs are too high. (Would a universal service type of outcome arise from a pure market operation? It’s debateable — at the very least, it’s uncertain.)
Another co-ordination problem is a whole district can’t easily sign up to a single network provider at once. The network provider has to engage in house-by-house sale. This is extremely expensive. A municipal network eliminates this transaction cost at a stroke.
There is also evidence that communications infrastructure generates new business and economic activity. This value is not captured by a traditional network operator (e.g. Google’s billions of revenue do nothing for SBC or Comcast). But if the general public is the network owner, their interests do align. There is real evidence that the net gains from any form of increased data connectivity are large (see this for example). It is unproven, although not unreasonable, to hope that a forced municipal network will indeed have this effect. Unlike most infrastructure white-elephants, the almost infinite flexibility of a telecom network significantly lowers the risk of such a public enterprise.
Next, there is the practical issue of a market forming over rights of way for new facilities-based entrants. Early phone networks involved massive looms of wire down the street from multiple providers. Planning laws, zoning and access restrictions prevent a proper market forming in this bottleneck.
Finally, there are internal public costs of service delivery. A municiapl network enables those local services to be delivered at potentially lower cost. This is particularly true when access is universal and non-digital service delivery channels can be eliminated.
There is also a non-market side to this. The operation of our democracy requires ideas to flow freely. The increasing dominance of digital media may displace traditional analog alternatives. (When did you last go on a protest march? Read a political pamphlet?) The current experience in Canada with Telus, cutting off access to union web sites that offended it, suggests that allowing a tiny handful of corporations to control this access is potentially dangerous.
Lastly, the invisible nature of information goods and rights of way emprically seems to lead to markets in them more easily being manipulated via political means and regulatory capture. The public don’t feel the pain of loss of the services they never got the experience, or the low prices they never saw advertised. The endless pleading and lobbying of telcos worldwide should be a warning signal of a market out of balance.
The trick is, of course, in balancing all these softer issues against the harder deadweight loss of a tax-backed transfer payment. But just because competition is good, it doesn’t mean that co-operation (if sometimes coercive) is automatically worse.
Posted by Martin Geddes at 02:34 AMTrackBack URL for this entry:
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In a Stupid network Model, the operator should be an Utility Provider such as a in motorways or energy business.
In France, the Millau Bridge has just been built by private firm Eiffage with a ROI on 20 Years.
So the biggest question today is : when will we see Stupid Network Operator (SNO) rising ? This competition will not have a lot of actors (as always with utilities) BUT the last 20 years model of Intel has proven that it's possible i.e
--> fixe a Stable contract (x86) with upper layers
--> set a unique parameter of performance : the computing power (MIPS)
--> improve timely your product --> Moore's law
--> keep the price flat
--> break chicken&egg --> don't think about applications
The SNO have the contract (IP), have the parameter (IP Transmission Speed), have the Business Model (Flat Fee).
So Who ????
Posted by: at August 10, 2005 08:26 AMWhile I'm not able to follow many of the arguments you present, nor will I waste my time on articles that damn collectives for DIY, I would like to observe that there are a wide range of "Muni networks" operating models.
Some, where the municipality is a monopoly supplier of services on their infrastructure are unlikely for all the usual reasons to be any step forward.
But, as is repeatedly mentioned, municipal libraries don't put bookshops out of business and the roads most cities build, support the third party service provision that is essential to competition.
If a municipality lays fibre or builds a wireless network that allows reasonable and non-discriminatory access by service providers, I don't see it as any more "Communist" (a bogey the Americans seem determined to never get over) than them building the roading infrastructure.
If its hard to make money out of something as essential as network infrastructure, (http://netparadox.com/) its proper home is as part of the commonwealth.
In my small country we have learned this about railways, and in yours (the UK) you too have learned the danger of monopoly shareholder driven rail infrastructure.
Structural separation, simple, dumb, obvious.
Yes municipal networks can be done wrong (Lafayette, Louisiana), but so can private ones. The chances are though, where there is electoral control and good understanding of the issue by the electorate, common (dare I say co-operative) infrastructure and competetive services are the go.
Finally lets please disabuse ourselves of the "special" nature of telecommunications, they are transport networks, no more no less, and we have been doing those in meat-space forever.
There are some unique outcomes of telecommunications networks, but that doesn't entitle them to any special treatment in their construction.
Posted by: at August 10, 2005 08:57 AMSome local US govts are quite troubled and this must be considered as part of the equation. Citizens may have a real problem with their cities investing millions of dollars (of limited financial resources) in a big meshed WiFi network, when they cannot restrain spending so that deficits are endless, cannot help but increase taxes faster than the rate of inflation, are corrupt by assigning contracts only to those who contribute directly to their political campaigns, who cannot provide even satisfactory trash collection / street cleaning / road maintenance services, etc. Often in practice, these government programs end up being wildly overbudget (taxes must be increased yet again), performing well below expectations, and delivering dreadful service levels.
So while many muni nets seem attractive in principle, these dreams often fall apart when met by the majority of local governments (some are progressive, most are not).
Posted by: at August 10, 2005 02:39 PMPersonally I think blanket support or condemnation of muni nets is not warranted. Each case on its merits, including the record of competence of local government and private enterprise. I guess people want a "clear winner", but in this debate there won't be one. I do believe that we'll see a substantal trend towards various forms of muni net, although by default I'd prefer the municipality to stick to "layer 0" right-of-way issues that naturally fall into their land management domain.
I disagree with Hamish; I think there is a case for special treatment on the basis of some unusual features of the information goods that these transport networks carry. But that isn't to belittle the precendent that other utility and transport networks provide.
Posted by: at August 10, 2005 04:11 PMI think that those opposing "socialist" buildouts in the U.S. are attacking a paper tiger. Most successful buildouts, like the one I wrote about yesterday that has been operating for 10 years (shameless plug http://www.isp-planet.com/fixed_wireless/business/2005/conxx.html CONXX) are public-private partnerships.
Most of the free market radicals who are opposed to "socialist" buildouts are in favor of privatization. Some compromised outfits seem to argue in favor of privatization only when it benefits their paymasters.
Small business can participate in muni buildouts, but lobbying machines can get the rules written to exclude them, just as the E-Rate rules were written to benefit the phone company and exclude cheaper wireless alternatives (see Dave Hughes' essay http://www.isp-planet.com/fixed_wireless/politics/2004/hughes_v_erate.htmlEnd E-Rate Now).
Fascinating post, Martin. Great stuff.
Posted by: at August 10, 2005 04:29 PMThe physical local loop is essentially a non-replicable-asset with a singular market: in simple terms: there is no economic sense in deploying multiple competing fibers from home to aggregration point. Why? because there is only one potential customer: the family or person who lives there.
The investment in the local loop cannot be allocated or sold to another customer (unlike metronets), so duplicate capacity would mean double costs with no added value to society.
This also means that the operator/owner of the local loop will always try to monopolize the customer for 20 years (depreciation period) on services.
In practice an adequate local loop (fiber) will not be duplicated.
This natural monopoly should not be abused to vest other monopolies (on services). Furthermore, the physical local loop is about infrastructure.
A municipality or government under democratic control is by far the better party to own this common resource that has so much value to add to society when accessible to everybody.
Muni networks which extend to supplying services miss however the point completely. Municipalities are extremely ill-suited to operate technology and develop services in a fast moving ICT and telecommunications world.
Posted by: at August 10, 2005 09:59 PM> I disagree with Hamish; I think there is a case
> for special treatment on the basis of some
> unusual features of the information goods that
> these transport networks carry. But that isn't
> to belittle the precendent that other utility
> and transport networks provide.
I don't think you can disagree with me on that basis, I acknowledged that there are some special outcomes based on the nature of what is carried, but fundamentally they are transport networks and should be treated as such. Its, according to Dertouzos a criteria of infrastructure that it is used for many diverse purposes.
As for differential pricing based on the value of the item carried, should a diamond merchant walking the footpath be charged more than a trash truck on the road? The value of the carried, even if it be a billion times more valuable (to whom?), should be irrelevant to the network.
The differential pricing theory is predicated on scarcity else it wouldn't be a tenet of the dismal science.
Que sera, sera.
Posted by: at August 12, 2005 08:57 AM